Oil prices are going down. Wait, what ?

This was my reaction when I saw oil prices drop recently to levels below $90. Not long ago they were indeed more around $110 than anything else. Lucky for us Thomas L Friedman from the New York Times brings some answers…

Here are some extracts of his once again brilliant article :

The price drop is the result of economic slowdowns in Europe and China, combined with the United States becoming one of the world’s biggest oil producers — thanks to new technologies enabling the extraction of large amounts of “tight oil” from shale — combined with America starting to make exceptions and allowing some of its newfound oil products to be exported, combined with Saudi Arabia refusing to cut back its production to keep prices higher, but choosing instead to maintain its market share against other OPEC producers.

The net result has been to make life difficult for Russia and Iran, at a time when Saudi Arabia and America are confronting both of them in a proxy war in Syria. This is business, but it also has the feel of war by other means: oil.

The Russians have noticed. How could they not? They’ve seen this play before. The Russian newspaper Pravda published an article on April 3 with the headline, “Obama Wants Saudi Arabia to Destroy Russian Economy.” It said: “There is a precedent [for] such joint action that caused the collapse of the U.S.S.R. In 1985, the Kingdom dramatically increased oil production from 2 million to 10 million barrels per day, dropping the price from $32 to $10 per barrel.

[The] U.S.S.R. began selling some batches at an even lower price, about $6 per barrel. Saudi Arabia [did not lose] anything, because when prices fell by 3.5 times [Saudi] production increased fivefold. The planned economy of the Soviet Union was not able to cope with falling export revenues, and this was one of the reasons for the collapse of the U.S.S.R.”

However, the situation is disimilar to the one of the 1980s in that oil is much more expensive to extract. Before, one just had to put his finger in the desert to have some oil gushing as one of my former teacher said ( well he didn’t say exactly his finger but for decency let’s just admit he did. )

Nowadays, extracting oil is an extreme sport and cost around $60 a barrel, not $5 or $10 as it was before. Albeit shale oil and deep sea drilling are bringing in some new crude, they aren’t exactly without risk and cheap.

Like it or not, deny it or not, peak oil is here. But solutions exist : from start-stop systems that we should install on all new cars globally from now on to public transportation, biking, walking and so on, there are a myriad of solutions.

Start-stop systems alone could enable America to save up to 10 billion gallons per year ( around 40 billion liters or 250 million oil barrels ) as I noted in a previous article.

But to push these solutions, we need to have high oil prices. To artificially do so, we could enact carbon taxes. That’s Thomas L Friedman’s opinion and I share his view on the topic…